We reiterated our recommendation on Aflac Inc. (AFL) at Neutral based on the company’s slow but steady growth amid interest rate volatility and de-risking of the investment portfolio.
The company’s second-quarter 2012 operating earnings per share of $1.61 came in line with the Zacks Consensus Estimate, but it modestly surpassed the year-ago quarter’s earnings of $1.55. Operating earnings climbed 3.9% year over year to $755 million. However, total revenue for the reported quarter jumped 16.0% year over year to $5.9 billion, but lagged the Zacks Consensus Estimate of $6.23 billion.
Aflac’s strong brand name and solid business model enabled it to improve earnings considerably faster than other life and health insurers. Most significantly, the company is a prime insurer in Japan in terms of individual policies in force, contributing over 80% to Aflac’s total revenue. The company continues to capitalize on its rapidly growing bank channels along with cancer and medical insurance policies. The optimism is also evident from management’s expectation of about 10% revenue growth in Japan in 2012.
Aflac has been achieving its earnings target for the past 22 years, which is reflected in its consistent dividend increment. The company’s strong brand name and solid business model enabled it to improve earnings considerably faster than other life and health insurers, such as Unum Group (UNM) and Employers Holdings Inc. (EIG).
Further, Aflac’s National Association of Insurance Commissioners (NAIC) risk-based capital ratio was estimated in the range of 560–600% in the first half of 2012, improving from 493% in 2011, reflecting the company’s stable returns. It is also impressive given the ongoing de-risking program. These positives are also validated by the rating agencies, Fitch and A.M. Best, who cast a stable outlook on Aflac’s financial strength.
However, given the cautious consumption levels, sluggish credit markets and currency fluctuations that affected both the institutional and individual clients; Aflac’s expenses continue to climb while significantly negating top-line growth and reducing margins. Additionally, investment losses and lower yields exacerbate financial risk. Increasing expenses, portfolio de-risking and the prevalent low rate environment have further impelled management to peg its earnings growth guidance at low-to-mid single digits in 2012 and 2013.
Further, Aflac U.S. continues to experience sluggish life insurance sales due to low demand, recent healthcare reforms and reduced client activity admist the ongoing market volatility. The company’s insurance brokerage distribution initiative is yet to produce any significant growth given poor recruitment and inadequate training infrastructure. Difficult comps have subsequently pegged the new annualized sales at a sluggish growth of 0–5% in the second half of 2012.
Based on the above factors, the Zacks Consensus Estimate is currently pegged at $1.65 per share, down about 1% year over year, for the third quarter of 2012. This is on the lower end of management’s guidance of $1.64–$1.69 per share. Three of the seventeen firms covering the stock have revised their estimates upward for the upcoming quarter, while no downward revision was witnessed. For 2012, earnings are estimated to be $6.52 per share, up about 3% year over year, and at the high end of the company’s projection of $6.45–6.52 per share.
The quantitative Zacks #3 Rank for Aflac implies a short-term Hold rating.
AFLAC INC (AFL): Free Stock Analysis Report
EMPLOYERS HLDGS (EIG): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
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